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401(k) Hardship Withdrawals for Medical Expenses
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401(k) Hardship Withdrawals for Medical Expenses
Exchange ideas about health plans, retirement, work/life benefits, and employee assistance.
Is there a guideline as to how recent a statement of medical or dental costs due has to be to be approved substantiation for a hardship withdrawal. I have heard everything from 3 months to 1 year, but
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Forums » Topic Forums » Benefits & Compensation » 401(k) Hardship Withdrawals for Medical Expenses
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 8:17 AM EDT
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Posts: 198
First: 5/6/2006 Last: 8/29/2011 |
Is there a guideline as to how recent a statement of medical or dental costs due has to be to be approved substantiation for a hardship withdrawal. I have heard everything from 3 months to 1 year, but cannot seem to find anything on the IRS website stating this. Thanks for any insight. |
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 9:38 AM EDT
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Posts: 2442
First: 2/12/2000 Last: 9/14/2011 |
Medical hardship withdrawal requests are always a facts and circumstances question.
The need must be "immediate and heavy" and the person must have no other way of paying for the expense. 1. Do you have a specific fact situation? I assume you do since you raised the question. 2. Are you the Plan Administrator? 3. Have other medical hardship distributions been approved? If yes what were the circumstances and how does this compare? 4. Why is more recent information not available? Keep in mind that improper distributions to active employees could cause the plan to be disqualified. |
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 9:53 AM EDT
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Posts: 2442
First: 2/12/2000 Last: 9/14/2011 |
I forgot to add that:
1. Not all plans have hardship withdrawals. 2. If the plan has a loan provision, this must be used first. 3. The employee has to show that he/she cannot go an obtain their own loan to obtain the funds. 4. Remember if you make a hardship withdrawal you must immediately add the amount to the employee's income. 5. Remember to read your plan's specific language regarding hardship distributions as plan requirements may be spelled out in the plan. |
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 9:57 AM EDT
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Posts: 2146
First: 2/15/2006 Last: 9/14/2011 |
Another thing I would consider is the amount of time it takes all the different entities to bill insurance and then to get down to the actual amount the person owes. Because the rules do state "unreimbursed medical expenses". That sometimes can take a while from the actual usage date. So if the person was required to pay a deductible up front, it could take months to get the finances straightened out.
And I would make sure the employee understood that the hardship withdrawal is still subject to regular income taxes AND the 10% early withdrawal penalty. I would expect for the employee to have documentation for the total requested based on bills from the different entities --- again they might have varying dates but the date of service should be within the same time window. The employer needs to do enough due diligence to be able to have a reasonable person look at the documentation and be able to prove the need. Some employers have differing lines as to where that is. |
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 10:24 AM EDT
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Posts: 198
First: 5/6/2006 Last: 8/29/2011 |
howard, yes I have a specific case today, but this has come up before. Our associate has a daughter that is a full time student and has been throwing out the more recent statements, supposedly because the balance has not changed and she has the older bills. 2. I am the Plan Administrator, and 3. Oh yes, dozens of hardships for medical expenses this year alone. The Plan Document does not specifically address this question, or really offer any specifics on any of the reasons. I find the IRS website unhelpful as well. I did a post awhile back regarding the "following 12 months of post secondary education", because I just don't see how anything other than the current semester could be substantiated. We do have a loan option, but the minimum is higher than that of a hardship, so at times, an associate without a loan is eligible for a hardship. Otherwise it is denied until a loan is taken. They have the option of having taxes withheld, and the provider sends them a 1099 for the tax year in which the hardship was taken. We also suspend deferrals for a period of 6 months. I was told by one of the reps at our provider once that insurance EOB's are excellent sources of substantiation, but I disagree. An EOB shows only what the patient is responsible for after insurance pays, but does not take into account any payments they have have already made, which would not be eligible for hardship dollars. I appreciate your input on the subject. |
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 10:33 AM EDT
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Posts: 198
First: 5/6/2006 Last: 8/29/2011 |
Rupert, thank you. The hardship rules are in places so very specific, but when it comes to substantiation, some is quite vague. Our provider's customer service call center takes the information over the phone and then faxes or mails the application to the associate, filled out except for the associate's (and my) signature. They also receive explicit information over the phone, and of course the Special Tax Notice is faxed or mailed to them as well...although I'd be surprised to find that people actually read it. The application that they sign covers the withholding as well, and their signature verifies that they have read and understand it. The application and substantiation is then faxed to me for approval. I guess my question regarding the timing of the medical bills and statements wouldn't be so much the date of service...some people let these things hang out there for months and even years before dealing with them, but the concern that because of some other financial need the associate could dig up some old medical bills or statements to use as substantiation for the money. I realize that I have no control over what happens once they get the check, but want to always know that I am doing my due dilligence. Thanks again. |
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 10:51 AM EDT
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Posts: 2442
First: 2/12/2000 Last: 9/14/2011 |
Would I be correct in understanding that it is the associate's adult daughter that has the medical expense? Those thrown away EOBs are of course available from the claims payment group and normally can be printed right from their website. I would not accept the concept that they are not available.
How old is the daughter and is she still a full time dependent of the employee? How are you determining what the net obligations of the family are for these medical expenses? How are you determining that there is no other source of funds available to the family? I am having a hard time seeing how a "heavy" obligation would not be at the minimum loan level. What are you using as the definition of a "heavy" obligation? |
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 11:05 AM EDT
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Posts: 198
First: 5/6/2006 Last: 8/29/2011 |
This is an adult daughter under the age of 26 who is a full time student attending college. I have access to the EOB's myself, but I would rather have current statements from the providers, as I have no idea what if any of the insured person's part of the bill have been paid. As far as loans, in this case there is already a loan outstanding, and therefore a hardship is the only option, at least as far as her 401(k) is concerned, and we do not allow distributions from our ESOP. Based on the rules of the Plan, the withdrawal must be necessary to satisfy the financial need and be immediate and heavy. We use the Safe Harbor standard for the reasons, and the associate may not request any amount above the immediate need, except the amount to pay necessary federal or state taxes and anticipated penalties. They also must have obtained all distributions, other than hardship currently available under all plans maintained by the employer.
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 11:24 AM EDT
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Posts: 2146
First: 2/15/2006 Last: 9/14/2011 |
Well, I can say that years ago, there were those that counselled people in financial difficulty (that needed hardship money out of the 401k for a reason that wasn't on the list) to stop paying their mortgage. To use that money to pay other bills and then to use the default/foreclosure notice to get the hardship withdrawal, since it WAS on the list.
Honestly, I don't feel it is up to the employer to decide whether there is other money out there to pay except possibly plan loans. There is no possible way an employer can always know the full extent of a person's financial situation. That said, if you DO know, then it would be fraud. But most employers take the employee's documentation and word as to the need. Do you have a TPA/consulting firm that you would consult with for issues relating to your 401k? They should also be able to provide you with a good set of guidelines. And here is what the IRS FAQs state "Generally, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. Most 401(k) plans use the "deemed necessary" rules described in Q&A-2 above, so that inquiry into the employee's financial status is not required. In other cases, an employer may generally rely on the employee's representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources. However, an employer cannot rely on an employee's representation if the employer has actual knowledge that the employee's need can be relieved: (1) through reimbursement or compensation by insurance; (2) by liquidation of the employee's assets; (3) by stopping elective contributions or employee contributions under the plan; (4) by other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer; or (5) by borrowing from commercial sources. (Reg. §1.401(k)-1(d)(3)(iv)(C))" I'd read through that question and the others at : http://www.irs.gov/retirement/article/0,,id=162416,00.html to get a good overall understanding from the IRS's point of view. |
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401(k) Hardship Withdrawals for Medical Expenses
posted at 8/29/2011 11:34 AM EDT
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Posts: 198
First: 5/6/2006 Last: 8/29/2011 |
Rupert, yes I'm sure people have been counseled to do all kinds of things to be able to access those funds. And I agree wholeheartedly with you that it shouldn't be up to me to verify this is the only existing option left. I do, however, advise them that in order for a hardship withdrawal to take place...it HAS to be. At that point, as long as they don't have any stock they could sell, or a loan from their 401(k) to take out, then as long as I have substantiation for every penny they ask for, it's generally approved. I actually had a lady ask for a few extra hundred dollars, and when questioned, she said she didn't think she had to "explain every red cent...after all it's MY money...and Christmas is coming up". Sorry Charlie...no extras. I sometimes ask associates if there is any way they could get a 'short term loan' from someone in order to pay off their current 401(k) loan, taking another one out behind it (as long is was initiated in a prior year) to pay the person they borrowed the payoff from, and enough left over to cure their hardship. It's rare that people in these situations are able to do that. I would say recently I've done more to avoid foreclosure or eviction than for any other reason. I'm very careful, and haven't failed an audit yet. I will read over the info you posted. Thank you very much. |
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